Pearz' Random Economics 101

Generally, I have no posts mid week with all my posts centered between Thursday - Sunday when all the shows air. With the recent turmoil faced in the EU over Greece, I decided to make a random post about this topic, it is my blog after all! Being very in-tune with worldly economics, I just feel this topic had to be talked about. Maybe I'll continue having random economic posts mid week if I have enough time and big events occurs. BTW: Tons of unrelated pics I have stored that I felt like posting.

So here is the latest updates for those that are lagged behind. The EU is facing a huge debt crisis with Greece on the verge of defaulting on their debt and Italy and Spain in extremely bad shape. Germany and France (still not that great) being the only countries holding up the EU right now. Greece has already received two of the installment of the funds to pay off some of their debt but this money still needs to be returned in the future. The EU has come up with a more permanent plan to help Greece out of their debt problems by reducing their debt by 50% and guarantee the other 50% debt to be payed. A referendum was called on Oct 31st for the citizens to vote if they want to accept the bailout package.

Here is what is on the line for Greece:
20% of wages already cut from public-sector last year with another about 20% proposed cut this year
Pension cuts of about 20%
Taxfree threshold lowered from 11,160 to 6,975 (basically if you earn under this amount in a year you pay zero income tax)
An extra 1-5% gross income to be paid twice next year for 2011 and 2012 income  (so basically everyone blanket taxed money)

Now, this may seem extremely harsh, but the debt of Greece is so high(143% of their GDP) that they need to do this or face bankruptcy. If you remember a month back, the US had to pass a bill to raise their debt ceiling to roughly 90% of their GDP which is already very extreme and Greece is that much higher. If you don't know what the problem is with high debt, eventually the debt just goes so high that a country can't even pay the "minimum interest" payment on their debt. When this happens, it means the debt will only increase, ballooning the problem further. This leads to people fearing that they will never get their investment back which leads to a downgrade in credit rating. As investor confidence is lost, you will need higher and higher interest rates to borrow money which just further escalates the problem.

This is part of the problem right now with the bailout package for them. They are being handed money, but they still need to pay interest on it, the problem isn't solved unless the government finds a way to "make more money" to be able to pay off the interest, hence all the cuts to everything.

Now that most the "facts" are laid out, I'll start about the EU economy in general. The basic idea of the EU is fundamentally flawed and only really functions when the economy is doing well. Here is generally what happens during a recession:
1. Country is doing badly so their currency drops
2. This in turn makes it so they owe less money
3. Easier time getting out of their debt
4. Also lower currency makes your countries products "cheaper" (because exchange rates) which increases exports and lowers imports (because those are more expensive)

This small currency change helps countries get back on their feet, but the Euro is working against them. The currency is still going strong so the money they owe is unchanging and their problems are just increasing and digging Greece into a deeper hole. Greece can't get out because the EU, in part, is also helping to push them down. You would think leaving the EU would solve the problem, but that is under the assumption that Greece is self sufficient enough to bring itself back to it's feet. This is only a short term solution in the end.

Greece still needs to be able to balance it's books to be able to make this work which they have no intention of doing. The benefits they have are just too much. To have your standard of living degrade so much is hard. If they were willing to accept their standard of living must drop, they would be loving that bailout package because it is miles better then what will happen if the default or leave the EU.

So for more recently the referendum. The best analogy (that only Canadians will truly understand) was the same referendum in Quebec when they want to separate from Canada. There was a huge movement of people wanting to separate Quebec, (much like Greeks wanting out of the EU and not take the bailout package) so a referendum was held. What was quickly realized was the media portrayal of the issues was blown up. Quebec didn't separate (which was a wise choice) because they actually get tons of money funnelled into their province and they would lose alot of money if they followed through.

The same can be said about Greece. The bailout package is greatly in their favour. The call for a referendum was a genius move by their leader since he was already under fire for a non-confidence vote; It was the perfect political move to secure himself in the seat. If the vote passes, it will show he is making the right choices as the leader and secure his position again. Chances are, if they accept this new bailout package, the debt crisis will be over a major hump and any other issue will get pushed under the rug as a problem for the future (much like what the US actually did too).

BTW: Whenever our next major recession hits (in 10-20 years) it is going to be ridiculously large because of all these problems they pushed aside this time. So much so, the whole world economy will collapse with it.

That is all fine and dandy, (at least for now) but what if they say no? The cuts are so ridiculously large that the average person will look at that and say no. That is mainly because they don't understand exactly the situation they are in, just like the idiots sitting near my office screaming "OCCUPY TORONTO!!", but I digress. You have many of them screaming to just file for bankruptcy (lulz) as a nation and be done with it. What they don't realize is the stipulations put on them if they file for bankruptcy would be EVEN WORSE. More so, since they will probably be out of the EU by then too.

With their country bankrupt and a worthless currency, they will be forced to only trade amongst themselves with zero ability to import any goods due to the prices. Within a short period of time, the whole country would revert back down to a 3rd world country since they do not produce enough to support itself (If it did, it wouldn't be in this mess XD). You would have mass exodus of anyone with any real technical skills to other countries leaving nothing but people looking for pension or uneducated workers. Greece will end up being plagued by even the basics of food with pensions outright disappearing since no one is working anymore. Even then those people will start leaving for better lands leaving a shell of a country until their country as a whole is bought out and restructured to actually be profitable.

The question comes to the huge ripple effect of letting Greece fall, that same bailout money would be used regardless. Instead of bailing out the country, they would in turn bailout the banks holding all this bad debt now. This is still a bad solution, but it would at least keep the markets slightly stable. The question is if that would be enough to topple Italy and Spain that are pretty wobbly atm.  If Italy and Spain can take that shockwave from Greece being out of EU, then all will be "well". If they don't we are all fucked. The domino effect of Italy and Spain will be so wide spread the recession will be unlikely to end within 5 years if not closer to 10. That is the real issue and noe one really cares about Greece, just the effect they will have on the other nations.

Knowing these reprocussions, I doubt they would let Italy or Spain fall. Other large countries will start to step in like China (since US is in pretty bad shape still). China will swoop in to help save bigger countries like Italy because they still have prospect. Italy is the 3rd largest economy in the EU with the 2nd largest debt. Here is the major difference though, Italy has already made the cuts to curb spending and is on track to balancing their books at least. It will be a slow recovery, but at least they are on the right track.

Lets face it, as of right now, Greece is just leaching off the EU. Their retirement age is at 53 and they are paid MORE then when they were actually working in retirement funds every month. With a higher life expectancy now, they are in retirement longer then they were actually working, so where is that money coming from? Their benefits they had were just ridiculous. This is the main reason why I think the referendum will be shot down. To lower such a high standard of living down is not easy to live with and they do not see the bigger picture (even if it is worse with any other choice).

The only possible way to keep any semblance of their standards would be to have other countries (Germany) to pay for all their stuff for them which they feel entitled to. Obviously that won't happen, So instead we will watch Greece burn for their idiocy. I am still leaning on Greece failing the vote just because they fail to realize how large a scope this really is. They assume that countries will keep bailing them out because the "have to". At one point, it would just be easier to bailout everyone else but them.

So after a semi-long post here is what to take away. I believe the referendum will fail because Greeks don't understand the scope of the problem. They fail to realize that this bailout package is the best thing for them and would rather take that momentary better living standard which will plummet to shit in a very short time; Short-sightedness.

On this note: China will likely be willing to spend big on the EU if it is back on the right track. Right now their reserves are all in USD and US isn't looking too good either. I am sure they will want to diversify their reserves so all their eggs aren't in one basket. Hence why they wanted to introduce a new reserve currency a good year ago but failed. This would be the perfect chance for them.

What the major problem with our global economy is the credit system. What started out small has ballooned to such huge proportions. 1 dollar has turned into 100. Here is that concept in a nutshell: I have 10 dollars and lend it to another person in promise he will return me 11. I now claim I have 11 dollars and this second person claims he has 10 dollars. This keeps spreading further and further until that real 10 dollars has been increased so many folds. This was mainly done to make people spend more to increase profit for future. The base concept is this: I can use 10 dollars to make 20 dollars in a year. Instead, I'll borrow 10 dollars and make 40 dollars and pay 2 dollars of interest on that 10 dollars I borrowed. In theory this is sound, until everyone starts wanting to collect on their debts and none of that money exists. Hopefully that explains the problem in a nutshell, maybe I'll go more in depth maybe in a separate post.

So TL;DR I think we are fucked and we are in for one bumpy recession ride when Greece fucks us all over.
Here is short list of what I think will happen:
1. Greece fails referendum and gets kicked out of EU
2. Ripple effect hits Italy and Spain
3. Money from bailout package for Greece is diverted to them instead with help from China adding in more funds
4. EU zone starts to stabilize again (but all word economies will take a hit from it)
5. Meanwhile, no one cares about Greece as it burns

On a side semi-related note: I part of the people that believe our our world will be run by corporations in the future. Governments will just be a shell of an existence much like the monarchy is now. I'll leave that for another future post.